From GARP to SIRP

With so much of the economy's health and direction dependent on people actually working, buying and paying taxes, it remains difficult to get too excited about our prospects.

This morning the headline was that layoff data for February reached a four year low. According to the Challenger analysis layoff announcements fell to 42,090 for the month. The ADP report showed job losses of 20,000 but government numbers released on Friday will likely be somewhat worse because of the methodology. ADP counts employees who worked no hours during the survey week as employed while the Bureau of Labor Statistics counts non-working employees as unemployed. The flattening of the slope of decline is certainly encouraging but what awaits across the recessionary valley remains very challenging.

Assuming employment cannot logically go to zero, the stabilizing is a modest light at the end of the tunnel. During the tepid economic recovery we have continued to lose jobs with over 1 million lost during the recovery period. Since the recession began the loss of jobs has reached 8.4 million. The workforce today is the same as in 1999 with both a larger economy and population. Depending on one's perspective, we are either wonderfully productive or woefully underemployed.

Total unemployment and underemployment is close to 17% and 40% of the unemployed have been without work for over six months. These are depression like figures. The U.S. economy is 12 million jobs below full employment. Estimates of time until we reach previous levels of full employment range from 5 to 10 years. Against that backdrop we would continue to expect to see a deflationary investment theme. The threats to that view would be from the public sector debt should policy begin to monetize debt, significantly weaken the dollar and become less attractive to foreign buyers of US treasury debt. All of those are possible.

The investment theme will continue to be safety and income at a reasonable price (SIRP), a far cry from the growth at a reasonable price (GARP) investment tune of not so long ago.

John Barnyak
Stonehouse Asset Management
(412) 849-3723